This is in incomplete analysis of capitalism. Insurance companies also make money by growing their customer base by offering better policies than other companies are offering. A more sophisticated analysis of risk is one way they do this.
Actually from inside the company (at the top) putting aside the return they receive from their investment capital, there are basically 2 mechanisms at play. There is the money coming in and there is the money going out. The money coming in is based on premium dollars. This is determined by rates and policy sales. Rates are determined by the underwriters. Bad underwriting can ruin an insurance company, and it has done so in the past. The number of policies sold is related to marketing and your sales force. This is the "good" side of the business. For most individuals and businesses the coverage is almost identical. There are standard policies in the industry, and once one company decides it needs to add an exclusion, every other company does the same. So selling policies is like selling any other widget where the consumer has a limited number of suppliers to choose from.
Of course when you involve an activity or other liability risk which is out of the ordinary, underwriters have a harder time doing their analysis and have learned to error on the side of a higher premium. Keep in mind the number of policies are very low or limited to one and there is not an untapped market for their product. In a case like USMS, the underwriters will base it on the history of USMS and similar organizations. However, when the activity is expanded through growth in numbers of participants or events, or the addition of something different like an OW event utilizing power boats, underwriting has to undergo a reassessment of the risk. Sometimes all it takes is one claim to raise a red flag, causing an underwriter do a reassessment. If no one has ever been injured by a power boat in 25 years of OW events, the risk would be considered low and the premium would reflect that. However, once you have an injury the underwriter may decide it was a risk he failed to identifiy and it was mere chance that it hadn't happened sooner. (An accident waiting to happen?) Once an underwriter makes that paradigm shift it can take a long time before they are ready to adjust down the nature and extent of the risk.
The "bad" side is the claims department. The basic philosophy is that the claims department is the one giving away the company's money, and this can be reduced through tough claims handling practices. In fact there are times the claims department gets the heat for paying out too much money when really it was an underwriting mistake. Since people don't really buy a policy based on how a company handles a claim, companies aren't compelled to make that a priority. And if you are dissatisfied with the way a company handles your claim what can you do? Do you really think other companies will fight for your business now that you have a history of claims?
This is in incomplete analysis of capitalism. Insurance companies also make money by growing their customer base by offering better policies than other companies are offering. A more sophisticated analysis of risk is one way they do this.
Actually from inside the company (at the top) putting aside the return they receive from their investment capital, there are basically 2 mechanisms at play. There is the money coming in and there is the money going out. The money coming in is based on premium dollars. This is determined by rates and policy sales. Rates are determined by the underwriters. Bad underwriting can ruin an insurance company, and it has done so in the past. The number of policies sold is related to marketing and your sales force. This is the "good" side of the business. For most individuals and businesses the coverage is almost identical. There are standard policies in the industry, and once one company decides it needs to add an exclusion, every other company does the same. So selling policies is like selling any other widget where the consumer has a limited number of suppliers to choose from.
Of course when you involve an activity or other liability risk which is out of the ordinary, underwriters have a harder time doing their analysis and have learned to error on the side of a higher premium. Keep in mind the number of policies are very low or limited to one and there is not an untapped market for their product. In a case like USMS, the underwriters will base it on the history of USMS and similar organizations. However, when the activity is expanded through growth in numbers of participants or events, or the addition of something different like an OW event utilizing power boats, underwriting has to undergo a reassessment of the risk. Sometimes all it takes is one claim to raise a red flag, causing an underwriter do a reassessment. If no one has ever been injured by a power boat in 25 years of OW events, the risk would be considered low and the premium would reflect that. However, once you have an injury the underwriter may decide it was a risk he failed to identifiy and it was mere chance that it hadn't happened sooner. (An accident waiting to happen?) Once an underwriter makes that paradigm shift it can take a long time before they are ready to adjust down the nature and extent of the risk.
The "bad" side is the claims department. The basic philosophy is that the claims department is the one giving away the company's money, and this can be reduced through tough claims handling practices. In fact there are times the claims department gets the heat for paying out too much money when really it was an underwriting mistake. Since people don't really buy a policy based on how a company handles a claim, companies aren't compelled to make that a priority. And if you are dissatisfied with the way a company handles your claim what can you do? Do you really think other companies will fight for your business now that you have a history of claims?
